Opening Bell

The Wall Street Journal reports on its Money & Investing cover that derivatives are predicting a collapse in the commercial real estate market, which has so far performed far better than its residential cousin.

While delinquencies on commercial mortgages dropped to a record low in January (a miniscule 0.27 percent), the Journal says the CMBX index is pricing in a default rate as high as 8 percent over the next year.

The WSJ quotes an analyst who says the index’s sky-high implication of default “doesn’t make sense,” and it is a high enough number to be scary. If that’s right, the economy will face another wave of hundreds of billions of dollars in losses and banks will be further weakened.

The paper reports that in the last seven weeks, prices to insure some commercial-mortgage debt have tripled, though it says critics suggest that short sellers piling into the CMBX are distorting it. The same thing was said about the ABX index, which measures the cost of insuring subprime debt, last year when it skyrocketed. It was one of the first indicators of something very amiss in that market, and it was dead-on.

While the WSJ story is good, it doesn’t do a great job of putting the moves in context—this year’s CMBX jump is only the latest in more than a year of such moves. At one time early last year, one group of AAA-rated commercial-real estate bonds was seen as being as safe as U.S. Treasury bonds and the CMBX priced its yield at just 0.04 percent more than the T-bond.

No more. Since that low, the so-called spread has multiplied by more than fifty to 2.04 percent as of yesterday.

The business papers all prominently display reports that Microsoft says it will open its closely guarded software code for other programmers and companies to use, in an effort to encourage “interoperability”—compatibility with other services.

The Financial Times and The New York Times go with the angle that the software behemoth’s move is a bid to fend off pesky European antitrust regulators (it goes without saying that there are no American antitrust regulators to fend off), while the Journal is kinder about Microsoft’s intentions, not mentioning the EU angle until the fifth paragraph of its A3 story.

The FT says Brussels bureaucrats are skeptical, reminding us that Microsoft has promised similar moves before but failed to follow through on them. The NYT notes, while the others do not, that the move could also be a way of clearing the way for Microsoft’s sure-to-be-closely-examined bid for Yahoo.

The Journal says the move is a bid to stay relevant in an Internet age where software is more flexible and faster-developing, with hordes of amateur and pro coders developing Internet program add-ons using so-called open-source software, which is an increasing threat to Microsoft’s computer-based software approach.

Many players, from Google to individual programmers, are using a host of free technologies to build new types of applications that work over the Internet. Popular programs such as Google Earth and free email services are the result. Increasingly, companies and individuals are melding existing Web sites and software into new applications.

The more people use these applications, the less need they have for Microsoft’s applications, or even for the traditional personal computer that runs Windows. By making its software more accessible, Microsoft is hoping to maintain the PC’s relevance.

Microsoft’s hometown Seattle Times combines the two angles while the Post-Intelligencer leans more toward the appease-the-Euros explanation. Both have good write-ups of the move.

The Washington Post says on its D1 that housing industry lobbyists are going to the mat to beat back a Democratic proposal that would allow bankruptcy judges to reduce the amount borrowers owe on their mortgages. The industry says it would raise the risk levels on mortgages, forcing banks to charge more to all lenders in the future.

The NYT leads its front page with a story on proposed federal bailouts for home borrowers whose mortgages are under water. It reports that a new study estimates more than one in 10 (8.8 million) borrowers owes more on their loan than their home is worth—the highest ratio since the Depression.

The Times doesn’t do a good job of explaining how most of the proposed bailouts it mentions would benefit underwater borrowers. But here’s one it does explain:

A more modest plan is being developed by John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies. His plan, still in rough form, would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.

It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher.

Now we’d like to see someone explain what kind of a floor these plans might put under home prices.

The Los Angeles Times reports from Iraq on a micro-finance program the U.S. has developed in Anbar province to stimulate its wrecked economy. The story isn’t exactly a rigorous examination, mostly relying on a couple of anecdotes, but it’s good to see any economic reporting from Iraq, and the micro-loan program seems to be a decent way to stimulate the middle class there.

The FT and Bloomberg report that DB Zwirn & Company is shutting its two biggest hedge funds after jittery investors tried to withdraw more than $2 billion—about half of its assets—after improprieties there. We’ve been wondering why there hasn’t been more hedge-fund wreckage in this credit crisis (though Bloomberg reports here on another fund with heavy losses this year). This one appears to have been done in by the appearance of impropriety—the firm’s owner’s private-jet travel was billed to the funds, for one thing.

The interesting thing here, though, is that its investments are so complex that it will take up to four years to sell them and cash out its investors.

On Thursday night, Zwirn sent a letter to investors outlining its plans to liquidate assets, about 60 per cent of which are not easily tradable and mostly involve illiquid loans made both in the US and abroad.
People familiar with the matter stressed that there would be no fire sale and that the process could take years, given the ugliness of current market conditions.

The WSJ has a great read on its Marketplace front on how food inflation is pushing shoppers to so-called salvage grocers, where food manufacturers unload products they’re phasing out or that are near or past their expiration date. It’s a booming business.

Lots of good Quote of the Day material in here, but we’ll go with this one, which has to be set up with the context:

Shelley Hoober, a 56-year-old shopper at the Leola, Pa., SharpShopper, says she exercises caution when selecting products, noting that she bought a box of surplus cereal that turned out to be infested with bugs. “You have to really watch the dates,” she says.

Eww.

This story deserved the offbeat treatment that only the page-one, middle-column “ahed” can provide

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.

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